Being in debt and trying to get out of debt can be overwhelming. September data from the Federal Reserve indicates that Americans have $11.63 trillion in debt.
While that number seems too big to truly comprehend, the unfortunately reality is that looking at your own finances — with overwhelming debt on a smaller scale — is all too real.
If you’re interested in getting out of debt, the process is far from easy. But it can be simple. Here are five steps you can follow to get out of debt:
1. Know what debt you have
The first step is to be brutally honest with yourself. How much debt do you have right now? Look at the numbers, no matter how hard it is to acknowledge the debt.
List each of your debts, along with minimum payments and interest rates. Face up to where you stand so that you have an idea of what you need to do to get out of debt.
2. Stop debt spending to get out of debt
One of the pitfalls that many people fall into is that they continue to use credit to make purchases. Progress is erased almost monthly as the cycle continues. Once you know what debt you have, it’s time to create a budget or spending plan so that you stop your debt spending.
Stop digging the hole. Once you’re comfortable with your new level of spending, you can begin taking concrete steps toward actually reducing your debt.
3. Start debt reduction and make it a priority
Once you know where you stand, and after you have stopped using credit to make purchases, you can begin reducing your debt. Look at your finances and determine how much money you have each month to make debt reduction payments. This should be money you can use beyond making minimum payments on your debts.
Even if it’s a small amount, every little bit helps. Identify that amount, and earmark it for debt reduction. It’s important that you make debt reduction a priority if you are serious about getting out of debt. This means that you need to pay down debt before having cable TV or going out to eat.
4. Focus on one debt at a time
After you know how much extra you have to make a debt payment, you need to focus your efforts on one debt at a time. Keep making minimum payments on everything else, but choose one debt to tackle first, using the extra payment.
Some experts, like Dave Ramsey, suggest starting with the lowest debt balance so that you can pay it off faster and experience a quick (and motivating) victory.
Others, though, suggest starting with the debt that has the highest interest rate. As financial expert and founder of Consumerism Commentary, Luke Landes points out that starting with the highest interest rate saves you money in the long run since the most expensive debt is paid off first.
Figure out which approach will work best for you, and get started. Once you’ve retired one loan, move on to the next.
5. Accelerate debt pay down
Finally, look for ways to speed up the process to get out of debt. This can include selling items online to raise cash for lump sum pay downs, or looking for side gigs to raise money each month for extra pay down money.
You can also find creative ways to cut your costs more to free up more money to accelerate your debt pay down. Put this money toward whatever debt you are currently working on. With a little planning and prioritizing, it should be possible to become debt free sooner than you expected.
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